Underpayment Penalty for 2023

[mitchden1]

In 2023, I expect my taxable income to be about 30% higher than it was in 2022.  I will pay estimated quarterly payments based on the Turbotax Form 1040.-ES. payment vouchers, however, I will owe significantly more than that. Would I incur a penalty even though I am paying the amounts that are on the 2023 payment vouchers? I know that I will have to pay it when I file my 2023 taxes.

Also, I am getting a small refund from my 2022NJ Income taxes so I don't have to make any 2023 NJ estimated tax payments.  Would I incur a penalty if I owe money to the State in 2023? If I wouldn't incur a penalty, I'd rather wait until I do my 2023 tax return.

[huck572]

I can't say what will happen with your state. I would look on the IRS website for publication 505 and read it carefully regarding underpayments in taxes for 2023 and what you can do to avoid them. You can figure out what you'll owe and send that amount to them to avoid penalties. You can send different amounts than what they are asking for as long as you have the forms completed to back you up.

[MonikaK1]

If you feel certain that you will owe more tax for 2023 than the total of your quarterly estimated payments as calculated, you may wish to revisit that section of TurboTax to be sure you included all estimated income, unless the balance will be covered by withholding from wages, pensions, etc.

There are a number of tools you can use to calculate your estimated taxes for 2023.

When you prepare your 2022 return, TurboTax will automatically calculate your 2023 estimated tax payments and prepare 1040-ES vouchers if we think you may be at risk for an underpayment penalty next year.

You can also calculate your 2023 estimated taxes and generate the payment vouchers by following the steps below. If you already filed, you will need to wait until your filed return is processed (payment acknowledged / refund received) before reentering your return. See here for the process to open/amend a return that has been filed.

To calculate estimated taxes and prepare Forms 1040-ES:

1. With your tax return open, search for 1040-es (be sure to include the dash) and select the Jump to link
2. Answer No to the question Do you want to change your W-4 withholdings for 2023?
3. Answer the questions about things like your 2023 filing status, income, and deductions
4. Eventually, you'll come to the Print Vouchers? screen. Answer Yes and we'll include your 2023 1040-ES payment vouchers when you print a copy of your return later

In addition, TurboTax's TaxCaster is available without opening your return and will estimate your total taxes for 2023.

You can also use the IRS Withholding Estimator to calculate amounts to be withheld from wages.

If your federal income tax withholding (plus any timely estimated payments you plan to make) amounts to at least 90 percent of the total tax that you will owe for tax year 2023, or at least 100 percent of the total tax on your 2022 return (110 percent for AGIs greater than $75,000 for single and separate filers and $150,000 for married filing joint), you most likely will not need to make additional estimated tax payments.

The 2023 tax year—and the return you'll file in 2024—will have the same seven federal income tax brackets: 10%, 12%, 22%, 24%, 32%, 35% and 37%.

If you estimate that you will owe more than $400 in New Jersey Income Tax at the end of the year you are required to make estimated payments. See here for more information from the State of New Jersey. 

@mitchden1

[mitchden1]

Thanks for your response. I copied the 2022 submitted tax return and made the changes in income, etc. and saw that my 2023 Federal and NJ tax liability will be much higher than it was for 2022. Obviously, I won't know the actual tax liability until I file in the first quarter of 2024. I estimate that I will owe about double what my tax withholding and estimated tax payments (per Turbotax) will be.

Since I'm getting a refund from NJ, Turbotax doesn't calculate any estimated tax payments.

[fanfare]

if you pay estimated tax evenly and it comes to 100% (110% for certain high income earners) of your last year's tax i.e. 2022 tax, you won't be penalized, even if your 2023 income is much larger.

April 15th is the first estimated tax payment date for 2023 estimated tax.

by then you will know exactly your prior year's tax, if you are filing on time.

this rule is for the simplified calculation of Form 2210, without resorting to Schedule AI.

@mitchden1 

[MonikaK1]

As mentioned in my previous response, you can choose to prepare new vouchers in TurboTax if you want to pay a higher amount quarterly, even if the amount you are already planning to pay is enough to avoid a penalty for 2023. Go to Other Tax Situations, Other Tax Forms, Form W-4 and Estimated Taxes.

You can also plan estimated payments to your state using TurboTax. See this article for details.

You can also make additional payments directly to the IRS online here.

You can make additional payments to New Jersey online here.

@mitchden1 

[Mike9241]

don't know NJ law regarding what has to be done to avoid penalties but if you go to there website and read their instructions for how to compute penalties you'll know what to do.   Federal I'll make this simple. to avoid penalties for 2023:

if 2022's adjusted gross income is below $150,000 your withholding and timely estimated tax payments for 2023 must equal or exceed 100% of you of your 2022 tax. if is $150,000 or more then your withholding and timely estimated tax payments must equal or exceed 110% of your 2022 tax. For what makes up your 2022 tax see the 2210 instructions

[fanfare]

@Mike9241 

You have the rule but you left out the evenly part.

each payment must be 25%  (  25% x 1.1 for high income) of prior year's tax 

or you are still susceptible to an under-withholding penalty.

Your prior year's tax is the tax on your 2022 tax return.

[jolenet5]

As far as Federal taxes go, as long as you pay the same amount in 2023 that was your tax liability in 2022, you will not incur a penalty.  This does not mean YOU WON'T OWE MONEY FOR 2023.

I'm don't know New Jersey tax law.